Coffee Chaos, Data Diligence

When you’re in the de-risking game, creating order out of chaos is what you do.

The coffee finally arrives more than 15 minutes after I ordered it. It’s tiny. And cold.

My companion at the table outside the cafe in central London is Clive Wellsteed, partner at consultant LCP, two-time
Knowledge Broker, and risk-transfer expert. He’d like a coffee too, please. It might arrive in time for the Brexit negotiations to start in March, we joke. Ha ha.

Chaos surrounds us. A gust of wind sends menus flying around the cobbled square (welcome to London in October); overworked staff scurry about delivering half-remembered orders and ignoring the two overly polite Englishmen trying to get another coffee.

Wellsteed is unflustered. When you’re in the de-risking game, creating order out of chaos is what you do.

Take the Philips Pension Fund. Under Wellsteed’s guidance, the UK pension completed a full buyout a year ago, transferring £2.4 billion ($2.9 billion) to Pension Insurance Corporation (PIC) in the country’s biggest all-in deal to date. It covered 26,000 members—and a lot of data.

All pension funds have the data problem. Records go back decades, well before the computer era and way back into the times of typewriters and microfiche—when ‘big data’ meant you’d need two people to carry the cardboard box of files to your desk.

Although the Philips data may not have been quite as chaotic as a central London coffee shop, all this information did pose its own challenges. Data for pensions already being paid, as Wellsteed points out, is generally pretty accurate as details are updated at retirement. But in the transaction with PIC, Philips also sought to hand off members who had yet to retire.

CIOLDI16_Portrait_SH2_Alex-Eben-MeyerArt by Alex Eben MyerThe transfer therefore included an ‘all-risks’ structure: as well as the insurance side of the deal, PIC became responsible for patching up any gaps in the data. Considering that the insurer also transferred out the longevity risk attached to the Philips fund to reinsurer Hannover Re at the same time—including risks attached to members yet to retire—there were a lot of moving parts to consider. But PIC, having completed a similar ‘all-risks’ deal last year for an unnamed £500 million pension, was more than prepared to dust off its microfiche reader.

Back at the cafe, the second coffee arrives—marginally warmer.

Now in possession of his beverage, Wellsteed notes that data was also crucial to the success of the innovative de-risking program employed by the ICI Pension Fund—also advised by LCP. Pensioner data was updated to include information about dependents, meaning the British engineering firm’s fund could be sliced up and transferred to insurers more efficiently.

Investment data also played a key role. In 2014, ICI completed the first of what is so far 11 separate transactions: a £3 billion buy-in with Legal & General. This involved ICI specifically targeting assets that the insurer wanted to hold for the long term, reducing any post-deal trading costs. Information and effective communication at work again.

Efficiency is not an option in this cafe. Wellsteed has another meeting to go to, so I agree to settle the bill. Surprise: when it arrives, the data’s wrong.